Listing Requirements of NASDAQ Private Market

– * last updated August 30, 2015 –

nasdaq-private-marketNASDAQ Private Market a joint effort between NASDAQ and SharesPost to provide a secondary trading market for high quality private issuers who want to remain private , but yet provide a trading forum for their founders, private investors and employees. It also provides other support services to client companies.

Securities related services are offered through NASDAQ Private Market affiliate, NPM Securities, a FINRA registered broker-dealer, member of SIPC and SEC-registered alternative trading system.

The listing requirements of NASDAQ Private Market are greater than a number of full stock exchanges.

Listing Requirements of NASDAQ Private Market

Members must meet at least one of the following:
Funding received(1) $30,000,000 within last 2 years
Enterprise value(1) $50,000,000
Total assets(2) $50,000,000
Total annual revenue(2) $50,000,000
Annual net income $750,000
Shareholders’ equity $5,000,000 and 2 year operating history
Sponsorship(3) Yes by recognized and experienced financial investor(s) with prior success in venture investments
Continuous Disclosure Requirements
Financial statements Audited annual financial statements and unaudited quarterly financial statements
Annual disclosures Management bios, detailed description of business (any significant developments, operations, competition and risks) and capital structure
Insider trading policy Adopt and enforce an insider trading policy

_________

Other Articles You May Find of Interest:

    _________

    Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

    Rule 701 — Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation

    – *updated August 30, 2015 –

     employee-stock-option-plansRule 701 under the United States (US) Securities Act of 1933 (“1933 Act“) provides a US federal exemption from registration for compensatory equity issuances of securities by private issuers.  Rule 701 was designed specifically for stock option and other compensatory employee benefit plans. It is available to US and Canadian private issuers who are not otherwise reporting issuers under the US Securities and Exchange Act of 1934 (“1933 Act”).

    In the US, the grant of options is generally not deemed to be a sale of a security for purposes of the 1933 Act. The exemption under Rule 701 is the for the issuance of the stock underlying the options. The offering of this underlying stock is considered to commence when the options become exercisable and to continue until the options are exercised or otherwise terminated.

    Rule 701 is fairly broad and does not require a federal filing be made in order to rely on the exemption. The issuer, however, must meet certain requirements to qualify for the exemption.

    The full text of Rule 701 is provided below for your convenience.

    ***

    § 230.701 Exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation.
    Preliminary Notes:
    1. This section relates to transactions exempted from the registration requirements of section 5 of the Act (15 U.S.C. 77e). These transactions are not exempt from the antifraud, civil liability, or other provisions of the federal securities laws. Issuers and persons acting on their behalf have an obligation to provide investors with disclosure adequate to satisfy the antifraud provisions of the federal securities laws.
    2. In addition to complying with this section, the issuer also must comply with any applicable state law relating to the offer and sale of securities.
    3. An issuer that attempts to comply with this section, but fails to do so, may claim any other exemption that is available.
    4. This section is available only to the issuer of the securities. Affiliates of the issuer may not use this section to offer or sell securities. This section also does not cover resales of securities by any person. This section provides an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves.
    5. The purpose of this section is to provide an exemption from the registration requirements of the Act for securities issued in compensatory circumstances. This section is not available for plans or schemes to circumvent this purpose, such as to raise capital. This section also is not available to exempt any transaction that is in technical compliance with this section but is part of a plan or scheme to evade the registration provisions of the Act. In any of these cases, registration under the Act is required unless another exemption is available.
     (a) Exemption. Offers and sales made in compliance with all of the conditions of this section are exempt from section 5 of the Act (15 U.S.C. 77e).
     (b) Issuers eligible to use this section
    (1) General. This section is available to any issuer that is not subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78m or 78o(d)) and is not an investment company registered or required to be registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
     (2) Issuers that become subject to reporting. If an issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)) after it has made offers complying with this section, the issuer may nevertheless rely on this section to sell the securities previously offered to the persons to whom those offers were made.
     (3) Guarantees by reporting companies. An issuer subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m, 78o(d)) may rely on this section if it is merely guaranteeing the payment of a subsidiary’s securities that are sold under this section.
     (c) Transactions exempted by this section. This section exempts offers and sales of securities (including plan interests and guarantees pursuant to paragraph (d)(2)(ii) of this section) under a written compensatory benefit plan (or written compensation contract) established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent, for the participation of their employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. This section exempts offers and sales to former employees, directors, general partners, trustees, officers, consultants and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered. In addition, the term “employee” includes insurance agents who are exclusive agents of the issuer, its subsidiaries or parents, or derive more than 50% of their annual income from those entities.
     (1) Special requirements for consultants and advisors. This section is available to consultants and advisors only if:
     (i)  They are natural persons;
     (ii)  They provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent; and
     (iii)  The services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities.
     (2) Definition of “compensatory benefit plan.” For purposes of this section, a compensatory benefit plan is any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.
     (3) Definition of “family member.” For purposes of this section, family member includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employee’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than fifty percent of the voting interests.
     (d) Amounts that may be sold
    (1) Offers. Any amount of securities may be offered in reliance on this section. However, for purposes of this section, sales of securities underlying options must be counted as sales on the date of the option grant.
     (2) Sales. The aggregate sales price or amount of securities sold in reliance on this section during any consecutive 12-month period must not exceed the greatest of the following:
     (i)  $1,000,000;
     (ii)  15% of the total assets of the issuer (or of the issuer’s parent if the issuer is a wholly-owned subsidiary and the securities represent obligations that the parent fully and unconditionally guarantees), measured at the issuer’s most recent balance sheet date (if no older than its last fiscal year end); or
     (iii)  15% of the outstanding amount of the class of securities being offered and sold in reliance on this section, measured at the issuer’s most recent balance sheet date (if no older than its last fiscal year end).
     (3) Rules for calculating prices and amounts—
    (i) Aggregate sales price. The term aggregate sales price means the sum of all cash, property, notes, cancellation of debt or other consideration received or to be received by the issuer for the sale of the securities. Non-cash consideration must be valued by reference to bona fide sales of that consideration made within a reasonable time or, in the absence of such sales, on the fair value as determined by an accepted standard. The value of services exchanged for securities issued must be measured by reference to the value of the securities issued. Options must be valued based on the exercise price of the option.
     (ii) Time of the calculation. With respect to options to purchase securities, the aggregate sales price is determined when an option grant is made (without regard to when the option becomes exercisable). With respect to other securities, the calculation is made on the date of sale. With respect to deferred compensation or similar plans, the calculation is made when the irrevocable election to defer is made.
     (iii) Derivative securities. In calculating outstanding securities for purposes of paragraph (d)(2)(iii) of this section, treat the securities underlying all currently exercisable or convertible options, warrants, rights or other securities, other than those issued under this exemption, as outstanding. In calculating the amount of securities sold for other purposes of paragraph (d)(2) of this section, count the amount of securities that would be acquired upon exercise or conversion in connection with sales of options, warrants, rights or other exercisable or convertible securities, including those to be issued under this exemption.
     (iv) Other exemptions. Amounts of securities sold in reliance on this section do not affect “aggregate offering prices” in other exemptions, and amounts of securities sold in reliance on other exemptions do not affect the amount that may be sold in reliance on this section.
     (e) Disclosure that must be provided. The issuer must deliver to investors a copy of the compensatory benefit plan or the contract, as applicable. In addition, if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million, the issuer must deliver the following disclosure to investors a reasonable period of time before the date of sale:
     (1)  If the plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) (29 U.S.C. 1104-1107), a copy of the summary plan description required by ERISA;
     (2)  If the plan is not subject to ERISA, a summary of the material terms of the plan;
     (3)  Information about the risks associated with investment in the securities sold pursuant to the compensatory benefit plan or compensation contract; and
     (4)  Financial statements required to be furnished by Part F/S of Form 1-A (Regulation A Offering Statement) (§ 239.90 of this chapter) under Regulation A (§§ 230.251 through 230.263). Foreign private issuers as defined in Rule 405 must provide a reconciliation to generally accepted accounting principles in the United States (U.S. GAAP) if their financial statements are not prepared in accordance with U.S. GAAP or International Financial Reporting Standards as issued by the International Accounting Standards Board (Item 17 of Form 20-F (§ 249.220f of this chapter)). The financial statements required by this section must be as of a date no more than 180 days before the sale of securities in reliance on this exemption.
     (5)  If the issuer is relying on paragraph (d)(2)(ii) of this section to use its parent’s total assets to determine the amount of securities that may be sold, the parent’s financial statements must be delivered. If the parent is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), the financial statements of the parent required by Rule 10-01 of Regulation S-X (§ 210.10-01 of this chapter) and Item 310 of Regulation D-B (§ 228.310 of this chapter), as applicable, must be delivered.
     (6)  If the sale involves a stock option or other derivative security, the issuer must deliver disclosure a reasonable period of time before the date of exercise or conversion. For deferred compensation or similar plans, the issuer must deliver disclosure to investors a reasonable period of time before the date the irrevocable election to defer is made.
     (f) No integration with other offerings. Offers and sales exempt under this section are deemed to be a part of a single, discrete offering and are not subject to integration with any other offers or sales, whether registered under the Act or otherwise exempt from the registration requirements of the Act.
     (g) Resale limitations.
    (1) Securities issued under this section are deemed to be “restricted securities” as defined in § 230.144.
     (2)  Resales of securities issued pursuant to this section must be in compliance with the registration requirements of the Act or an exemption from those requirements.
     (3)  Ninety days after the issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), securities issued under this section may be resold by persons who are not affiliates (as defined in § 230.144) in reliance on § 230.144, without compliance with paragraphs (c) and (d) of § 230.144, and by affiliates without compliance with paragraph (d) of § 230.144.
    [64 FR 11101, Mar. 8, 1999, as amended at 64 FR 61498, Nov. 12, 1999; 72 FR 71571, Dec. 17, 2007; 73 FR 1009, Jan. 4, 2008]

    _________
    Other Articles You May Find of Interest:

    _________

    Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

    Stock Options of U.S. Private Companies

    – *updated August 30, 2015 –

    Start-up companies tend to reward their directors, officers and employees with stock options.  In the Unite States (“US“)  most do so through formal incentive stock option plans which are structured as either incentive stock options (“ISOs“) or non-qualified stock options for tax treatment purposes.  Although tax issues are important, securities laws  should not be ignored when issuing stock options.  This article provides a general overview of Rule 701 which private companies (domestic and foreign) may rely on when issuing stock to US residents.

    Stock options and the underlying stock are securities.  Both the options and the shares of stock subject to an option must be registered under the federal and applicable state securities laws unless an exemption from registration can be found.  Rule 701 under the Securities Act of 1933 (the “1933 Act”) provides a federal exemption from registration for benefit plan securities issued by private company issuers.

    In order to rely on Rule 701 the following requirements must be met:

    • Non-Reporting. The company must not be a reporting issuer pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”);
    • Qualified Recipients. The issuances must be made to qualifying individuals – generally, employees, directors, general partners, trustees (where the issuer is a business trust), officers, or qualifying consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders of the company or its subsidiaries.  Rule 701 does not exempt issuing shares to companies, or to non-employees who help in fund raising or promotion of the company;
    • Amount Caps. The amount of securities issued is less than one of several limits, during any 12-month period:
      • the aggregate sale price of shares granted cannot exceed $1,000,000; or
      • the number of shares granted cannot exceed 15% of the total assets of the issuer; or
      • the number of shares granted cannot exceed 15% of the outstanding common stock (including any preferred stock on an as-converted basis); and
    • Informational Requirements: Optionees must be provided with a copy of the plan or agreement to issue the securities, which must be in writing (incentive, stock option, stock appreciation or stock purchase plan, an individual incentive, option or similar agreement, or an employment agreement).  Additional disclosure must be provided if the aggregate sales price in any 12-month period (measured for this purpose as the sale dates rather than the grant dates) exceeds $5,000,000.  This additional  disclosure material includes a summary of the material terms of the plan, risks associated with investment, and current financial statements.

    Offers and sales pursuant to Rule 701 are not integrated with those under other exemptions, so the 35 non-accredited investors allowed under Regulation D will not be diminished by issuing options covered by Rule 701.

    Issues to Keep in Mind

    Blue Sky. A company must also ensure that it complies with state regulations when issuing stock options under Rule 701.  Rule 701 offerings are automatically exempt from state filing requirements in a number of, but not all, states.  You will need to rely on an available state exemption in the state in which the recipient of the stock option resides.  State requirements can vary considerably.  For instance, New York and New Jersey require pre-issuance filings with their state regulators.  California regulators have substantive rules regarding the terms of options and grants to employees and consultants, such as minimum vesting schedules and pricing terms.  (The rules in California are currently under review).  Before issuing options you should review the applicable state laws for compliance.

    Limit Number of Shareholders. A private company may inadvertently become a public reporting company if the compensation benefit plan adopted increases the number of shareholders to 2000 or above.  Under the 1934 Act, any company with more than 2000 shareholders is subject to public reporting requirements as well as the SEC’s proxy and insider-trading rules (no-action relief may be possible from the 2000 shareholder limit).

    Issuance of Public Debt Removes Eligibility to Rely on Rule 701.  Rule 701 offerings are available only for companies that are not subject to public reporting obligations.  If a company files an exchange offer registration statement it becomes legally subject to reporting requirement to at least until the end of its fiscal year. (Thereafter, the issuer typically is required by its bond indenture to continue to file periodic reports, but may not be legally subject to public reporting requirements). Rule 701 is not available during the period in which a company is legally subject to reporting obligations; however, offerings to employees registered on Form S-8 can be made.

    Taxation.  Two types of stock options receive special treatment under the Internal Revenue Service Code (“Code”): incentive stock options (ISOs) and options under an employee stock purchase plan (ESPP) that is qualified under section 423 of the Code. There is no recognition of income on the option grant or on the exercise of the option under either of these programs, provided that certain conditions under sections 422 and 423 of the Code are satisfied. Additionally, if the stock is disposed of after completion of the statutory holding period, any appreciation will be taxed as capital gain.  Non-ISO options and non-ESPP options are taxed at the time of grant.

    To qualify as an ISO, stock options must be issued only to an employee and must have an exercise price not less than the fair market value on the date they were granted. The company cannot grant the employee ISOs exercisable for more than $100,000 in stock in any year.

    Resale of Private Company Stock Options

    Securities sold pursuant to Rule 701 are “restricted securities” and can be resold only pursuant to an effective registration statement, unless an exemption from the registration requirements is available.

    Ninety days after the company becomes a reporting issuer under the 1934 Act, securities issued under Rule 701 may be resold by persons who are not affiliates (as defined by Rule 144 of the 1933 Act), without compliance with manner of sale provisions, notice requirements, current public information requirements, or volume limitations of Rule 144, and by affiliates without compliance with paragraph (d) of Rule 144.

    Other Exemptions

    In addition to Rule 701, private companies may rely on a number of other exemptions from the registration requirements of the 1933 Act when issuing stock options.  These exemptions include:

    • Regulation D:
      • Rule 506,
      • Rule 505;
    • Section 4(2);
    • Other sundry exemptions.

    It is always wise to check with your legal counsel before implementing or issuing any option plan.  Looking for an available exemption from registration after the fact can hold some nasty surprises.

    Consequences of Securities Law Non-Compliance

    Failure by a company to comply with federal and applicable state securities laws will provide an optionee rescission rights to both the option and underlying shares exercised.  The company would be required to repay to the optionee any amounts paid or incurred by the optionee in connection with the acquisition of the securities.  These amounts may be nominal or substantial and depending on the fortunes of the company the cash demands could be material.

    There is also the possibility of state or federal enforcement actions against the company or those individuals responsible for the failure to comply.  An enforcement action is independent of the right to rescission.

    Click here to access full text of: Rule 701

    _________
    Other Articles You May Find of Interest:

    _________

    Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.